Give us a brief about this product –commodity structured finance?
Structured Commodity Finance (SWF) is a specialised way of funding to clients where the bank has title and control of goods through a title document such as a warehouse receipt, an original bill of lading or equivalent document.
Structured Commodity finance can cover funding of all of commodities such as softs, metals and energy. Soft commodities include sugar, cotton, coffee, grains and pulses among others.
Financing of such commodities is based on the intrinsic value of the commodity and it is self-securing in nature allowing the client to access more working capital than they would get in conventional lending.
Through SWF, traders or producers can stock commodities during bumper harvest when prices are low and only sell when market prices are better.
For many years many commercial institutions have avoided financing agriculture, why now?
Lending to agricultural sector is generally perceived to be a high risk compared to other sectors such as manufacturing, services, trade & commerce, construction among others, where cash flows are more certain. Agricultural business in Uganda is rain-fed, managed by small-holder farmers and the sector is exposed to the risks of weather vagaries, price volatility, forex fluctuations which increase overall risk. Financial institutions, therefore, need a deep understanding of the sector and must have structures where the risk can be mitigated or shared with other parties.
How many commodity traders have benefited from your services?
We have financed several players in different value chains including grains, coffee, oilseeds, cotton, and cocoa among others. What we do is large scale.
Traders who are large scale will be able to aggregate and have sizeable quantities a bank can look at. The amount we do lend out also depends on the size of the trader, aggregator but we give out anything above Shs100m.
How much have you so far given out?
Because these loans are borrowed and paid-off, I can only tell you that we have over Shs200 billion to lend out on this programme. But this is seasonal, during the peak season, the amount goes higher and it drops during the off-season. Currently, we have up to 20 per cent of our lending book dedicated to Agriculture and credit to the sector forms a significant portion of our lending.
What are the criteria for choosing or selecting the beneficiaries?
Any trader who would want to borrow from us will be subjected to our normal appraisal process by our bank. Ideally, one has to aggregate these commodities, be able to find a buyer, have a credit history of doing similar business.
The other important thing is to have a storage facility whether owned or rented with a trading track record. The trader should get a contract from the buyer and do business formally. The trader must have the experience in this business and this will give us a strong basis to consider giving you the loan. This will be easy to manage and for traceability purposes.
Where in all this is the smaller trader/farmer?
We also work with small ones. We have, for example, financed an activity in Lira-Northern Uganda for smallholders. The warehouse we have in Lira allows smallholder farmers to deposit their oil seeds such as sunflower and soya. The farmer will choose when to borrow and through the commodities he/she has deposited will be able to access the loans. And the amounts of money these smallholder farmers get vary between Shs10m and Shs20m.
Talking about the cost of the loans; what interest rate do you offer?
Interest rate is usually determined by the risk and cost of funds. But we have the facility called the Agricultural Credit Facility managed by the commercial banks and Bank of Uganda for which we have agreed to offer 15 per cent for grain trading and 12 per cent for capital development.
How much money have you so far disbursed and set aside for this type of financing?
We don’t have to set aside money because as a bank, all we said is that up to 20 per cent of our balance will be dedicated to agriculture. Today, we have loans in excess of Shs1.5 trillion and we can do up to 20 per cent of this which is about Shs250b specifically for the agricultural sector. But most of our lending into this industry goes for commodities because they are the most bankable.
What is the rate of risk or are there instances when those you lend to never returned the money?
Over the last five years, we have never written off money that we lent to traders.
But we have had some instances of one customer over fraud. The customer took money and part of the money was diverted. In this kind of commodity, the controls need to be tight because you are relying on the commodity as a security. So if you don’t have the security and someone diverts the money, then your actual fallback position is weakened.
Are these loans secured?
We take insurance and where we have a collateral manager who is required to have a significant balance on his account.
So if something goes wrong, our first fallback position will be the collateral manager in case there is a problem. These usually have insurance over infidelity issues.
Uganda is an agrarian economy but majority of commodity producers largely depend on nature/rain to produce. With climate change sometimes the yields are low. In terms of liabilities as a result of whether unpredictability, who bears the loss?
Weather vagaries are one of the key risks that impact yield for rain fed agricultural production. Many commercial farmers need loans to finance inputs like seeds, fertilisers, herbicides among others before plantin. But the challenge many lenders face is the loss of yield due to bad weather.
This risk can be mitigated by banks taking multi-peril insurance cover that mitigates the risk. The cost of insurance is paid by the farmer but it is subsidised by Government.
Efforts to finance commodity/agriculture financing as evidenced by Agricultural Credit Facility (ACF) hasn’t really paid off, thanks to emerging encumbrances some of which are by design. So how will this plug that gap?
This initiative allows traders and farmers to have access to capital in the circumstances they would ordinarily not. Ideally, in traditional banking one would be required to prove and borrow against collateral which is visible. With such initiatives, you move away from the traditional ways of accessing funding which they never used to.
And what’s in it for you as a bank?
We are doing this because most people in Uganda depend on agriculture as their source of livelihood.
As much as most of the population doing agriculture is smallholders, we can find a way of aggregating them into large production. By providing such facilities, they will be able to grow their businesses and the bank can make money through bigger numbers of clients.
What are some of the unique challenges you have encountered from the time you introduced commodity Financing?
Looking at most of the commodities that we are handling, size has been a bigger challenge. This is because production is in the hands of smallholders, yet many buyers globally tend to ask for bigger contracts and the local people cannot supply them.
By design structured financing such commodities needs you to have a minimum scale to meet all the costs.